The trade-off between intra- and intergenerational equity in climate policy

- Inequality aversion over consumption generally lifts the consumption path of the poor region.
- It generally lowers the consumption path of the rich region.
- This leads to more investments in dirty capital in the poor region and more investments in clean capital in the rich region.
- Based on this the effects on emissions is not clear.
- As a result, the emissions in the poor region may actually increase in the social optimum.
- This justifies the claim often made by the developing countries that the developed countries should take the biggest climate burden.

This paper focuses on two equity dimensions of climate policy, intra- and intergenerational, and analyzes the implications of equity preferences on climate policy, and on the production and consumption patterns in rich and poor countries. We develop a dynamic two-region model, in which each region suffers from global warming, but also has an inequality aversion over current consumption allocations. Inequality aversion generally lifts the consumption path of the poor region, while the rich region must take a greater share of the climate burden. Furthermore, with inequality aversion, the optimal climate policy generally leads to higher investment in clean capital in the North and in dirty capital in the South, thereby allowing the South to pollute more and develop faster. The optimal policy may even require the poor region to increase emissions relative to the uncoordinated Business-as-Usual case. Introducing local pollution and transfers confirm the main results.